How Mumias mess costs shoppers Sh71m a day

Lucy Chege could pass for any other middle-income shopper, but when it comes to sugar, her choice is not driven by price. She has bought Mumias Sugar for as long as she can remember.

In more than 10 years, she told Business Beat while doing her mid-month shopping, she has only picked a different brand once or twice, even though Mumias is often more expensive.

“I’m not sure why [I pick Mumias], but I guess it is because I don’t think I need to use much for the sugar to taste,” Ms Chege said.

“If I ever picked another brand, it must have been once or twice when Mumias was not available.”

Paying a premium

She is among thousands of consumers who have stuck by Kenya’s largest and oldest sugar miller for years, paying a premium to support the “Buy Kenya, Build Kenya” mantra.

However, preferences by consumers like Chege have led to the Sh26 billion in annual profits booked by middlemen and retailers from the estimated 500,000 metric tonnes of sugar produced locally.

Here is how it works out.

A spot check on Friday in Nairobi’s retail outlets showed that Mumias Sugar was the most expensive at Sh245 for a 2kg packet, followed by Sony at Sh240, while the cheapest brands cost Sh200.

Despite retailing at 22.5 per cent more than the cheapest brands, Mumias’ product was the most preferred by shoppers, a shop attendant at Tuskys Supermarket along Nairobi’s Kenyatta Avenue said.

To compete with a company that once commanded 60 per cent market share, other sugar millers push their product by pricing their sugar just below Mumias’ prices, and report profits.

But findings from a Parliamentary Committee suggest that the price consumers pay for locally milled sugar should be lower than prevailing rates.

An ongoing probe by the Agriculture Committee of the National Assembly has found irregularities that are helping middlemen and retailers book the largest gains in the sugar supply chain.

According to the committee’s draft report, the current ex-factory price is Sh3,600 per 50kg bag (Sh72 per kilo), inclusive of taxes, but retail outlets sell sugar to consumers at Sh125 per kilo.

A final recommendation is expected that would allow the Government to have a say on price limits on the commodity, through a value chain management strategy.

Given how low the ex-factory price is, it means consumers are paying up to Sh53 more per kilo to the supply chain, a staggering 72 per cent mark up.

“This benefit is not cascaded to the miller, consumer, retailer or tax collector, but middlemen of sugar marketing,” reads the report in part.

Working backwards

The more than 300,000 sugarcane farmers across the country receive the shortest end of the stick, and have consistently complained about the poor pay they receive, which is currently below Sh3,000 per tonne, against deliveries.

Further, in several instances, farmers go months before being paid for their crop, despite the sugarcane reaching consumers as milled sugar, alcoholic cane spirits (from ethanol) or even electricity generated from bagasse — the waste remains after sugarcane is crushed and sap extracted.

Working backwards, the production cost for millers is no more than Sh60 per kilo, but could be much lower if factory inefficiencies are addressed.

Add to this amount applicable taxes, including value added tax and a sugar development levy, which add on about 20 per cent to costs.

Most millers are able make at least Sh10 in net profit per kilo of sugar, even in the worst of production circumstances.

So who is making the bulk of the profits?

Pamela Lutta, the commercial director at Mumias Sugar Company, said consumers are exposed to players in the supply chain.

“We do not quite have control over retail prices as sugar millers,” she said, adding that the sector was unique in this structure.

Often, she said, retailers and distributors determine how to price sugar, as individual producers do not have full control of the supply chain.

“There is no direct relationship between the ex-factory prices and the eventual price paid by consumers,” she said, arguing it was a thorn in the side of the entire sector and not specific to her firm.

While millers may claim to be helpless in determining sugar’s eventual cost, answers to the rather simple problem are well-illustrated in a recently leaked forensic audit report on Mumias done by KPMG.

In its report, the audit firm pointed out a major anomaly in the distribution system at Kenya’s largest sugar miller, which is replicated in other State-owned factories and is responsible for the high retail prices.

Over the three-year period covered by the probe, starting July 2011, over 70 per cent of Mumias’ supply chain was handled by only 28 firms.

The individuals behind the distribution firms could be fewer, KPMG found, as two of the biggest firms “very likely” had common directorships.

In a specific instance that raised concern, YH Enterprises and Moyale Stores used each other’s letterheads interchangeably in official communication with Mumias.

Forensic auditors were able to identify the similarities in signatures, leading to the conclusion that the letters that were worded exactly the same were signed by one person.

Price correction

How would this affect shelf prices?

Consumers’ fate lies with middlemen who deliver sugar to retail outlets, with millers ceding control of the sugar market to very few people who had long-running contracts.

With such unprecedented control over millers, distributors are able to create artificial shortages to force a pricing review, usually upwards.

A corresponding downward price correction is rare or improbable, according to Stephen Mutoro, the secretary general of the Consumer Federation of Kenya (Cofek).

“It is a very complex syndicate where brokers have replaced the company as the forces that determine supply and demand,” said Mr Mutoro.

Top managers of sugar manufacturers, as in the case of Mumias, could be beneficiaries in the arrangement that allows other parties, rather than producers, to be the biggest beneficiaries in the sugar supply chain, he added.

“Constraining the distribution channels only sets the ground for corruption and hoarding, with consumers being the biggest losers,” Mutoro, whose body seeks to protect consumers from unfair trade practises, said.

Indeed, KPMG questions the selection criteria used to arrive at the few distributors on Mumias’ list, while raising issue with the subsequent after-sales discounts that only served to ensure the product was sold below cost.

Mutoro added that a class action by consumers against millers is on the cards, following the exposure of malpractice in the sector that has for the first time given an indication of why consumers were paying so much for sugar.

Kakamega Senator Boni Khalwale has also promised class action against present and past managers of Mumias — whose factory is in his county — for “enriching themselves at the expense of sugarcane farmers and consumers”.

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